Know Before You Go Offshore

Outsourcing manufacturing jobs to overseas markets is nothing new, but many employers who never before considered overseas outsourcing are now doing so.

Technological advances in communication have opened up vast new markets of highly-educated, low cost foreign labor to U.S. companies. The technology industry was among the first to take advantage of these markets, and with some of these companies reporting a 70 percent reduction in their labor costs, other industries are now taking notice.

However, before making the decision to use offshore labor markets, employers should be aware of the legal issues that are likely to arise.

Offshoring (outsourcing to overseas markets) can be accomplished in one of two ways. The first is a U.S. company contracting with an existing foreign company for certain services. The second is a U.S. company estabishing its own business in a foreign country and directly employing foreign nationals.

Before choosing which, if either, is appropriate, consider the following:

Understand the Labor and Employment Law of the Host Country
Even countries as close in geography as Canada and the United States have fundamental differences in their approach to labor. U.S. companies operating abroad must abide by the labor and employment laws of the host country. While U.S. citizens working for U.S. companies abroad may be protected by the labor and employment laws of both the host country and the United States, these laws can frequently conflict, placing the employer in a difficult position.

International Treaties and Agreements
Before offshoring, understand what treaties, if any, exist between the United States and the host country. For example, in the United States, anti-discrimination laws generally apply to foreign corporations operating in the U.S. However, certain treaties allow, for example, preferential treatment for the hiring and promotion of executives from the corporation’s home country, pre-empting the application of U.S. anti-discrimination laws.

Under some circumstances, subsidiaries incorporated in the host country, but fully owned by a foreign corporation, may also be able to invoke the protection of such treaties on behalf of the parent company.

Joint Employer Status
The joint employer doctrine says that an employment relationship, even where one does not exist, takes place if one company exercises sufficient control over the employment decisions of another company. While the level of control necessary to establish such a relationship can vary from country to country (and even from law to law within a country), U.S. employers should be wary of assuming liability for decisions over which they have little control.

Work for Hire
Contracts need to specify ownership of any intellectual property that may be created through the employment relationship. Do not assume that your target country is a signatory to, or abides by, international intellectual property treaties. Also, consider that if you contract through another company for services, absent specific language addressing ownership of intellectual property, ownership may default to the subcontractor.

Employers with U.S. citizens working abroad must still abide by U.S. tax laws for payroll taxes and withholdings. Apart from payroll taxes, employers should consider whether the work passing between the United States and the offshore employer might be subject to import and export taxes or restrictions.

In summary, while the opportunity for reduced costs associated with outsourcing may be attractive, it’s important to understand all aspects and implications of the arrangements being created.

Terry W. Bonnette is an attorney with Nemeth Burwell, P.C. in Detroit. He can be reached at [email protected].